The Recovery Momentum

The Federal Reserve moves to centre stage this week. Outside of the US and Chinese inflation measures, it looks to be a relatively light week in terms of high-frequency economic data. Investors are still ruminating over the surprising jobs report (gain of 2.5 mln jobs vs. forecasts for 7.5 mln loss). Yes, there were classification problems, and a lower participation rate dampened the unemployment rate. But, the unexpected 290k rise in Canadian jobs seems to lend credibility to the underlying signal that the worst has passed.

The US data was enough to boost the already strong global recovery trade into COVID-19 escape velocity. This week will focus on the Fed’s upcoming rate decision and reopening momentum across the globe. Two highly coveted reports will also be released by the World Bank and the OECD, which will only represent their best guess on how the global economic recovery will turn out. Investors will also pay attention to the euro-area finance ministers’ next round of talks with the EU’s recovery package and the Eurogroup presidency succession. US-China trade tensions will also remain a focal point as both sides continue to exchange jabs.

Here are the key-pointers for major economies and markets:

Country

 US – FED in focus

1. The US dollar rally in New York on Friday, looks to have run its course already as the greenback falls across the board in early Asian trading. The dollar was boosted on Friday by the rise in US Treasury yields post the data.
2. However, the rotation out of US dollars appears to have resumed, with the dollar easing against major and regional currencies in early trade.
3. The Chinese yuan again fixed at a stronger rate at 7.0882 versus 7.0965 on Friday. That should lend support to local Asia currencies as trading gets underway in earnest to start the
4. The reopening of the US economy continues with New York City expected to reach their first phase of reopening on Monday.
5. While New York continues to have the right trajectory regarding new coronavirus cases, concerns are growing that the recent protests could result in a significant spike of cases.
6. Health experts are also growing cautious that many parts of the country are starting to see higher cases and that could eventually derail many states from reaching their next reopening phase.

Uk’s recovery momentum

1. The economy is continuing to reopen, despite widespread concern about whether measures are being unwound too soon.
2. Still, the numbers continue to improve. That will be tested in the coming weeks though, especially if the good weather continues and people flock to beaches and parks.
3. The Bank of England meets during the EU summit (June 18) and is expected to expand its bond-buying program.

Three new initiatives from Europe were expected to be forthcoming

1. The ECB delivered its Pandemic Emergency Purchase Program by 600 bln euros and extended it to six months to the end of June 2021.
2. The second initiative is the Targeted Long-Term Refinancing Operation later this month. If specific targets are reached, and there is no reason to think that they won’t be, banks will be able to borrow funds at an incredible minus100 bp.
3. Thirdly, Europe continues to debate an EU-level support program, which looks likely to include loans, grants, and guarantees.
4. A unanimous agreement, which is required, alongside EU Parliament consent, may be difficult to conclude this month. If there is a 30% chance that the 750 euro package is approved, the expected value is 225 bln.

Germany announced a 130 bln euro fiscal package

1. While the headline is about 4% of GDP, the actual new funds or what the Japanese call “clear water” is a little more than half. Still, Germany is positioning for a robust recovery, which appears to set the stage for increased divergence at some point with Europe.
2. This may be another example of the “K” type of bottom we expect, where pre-existing conditions matter as does the policy response. Some will emerge in a stronger relative position, and Germany is bound to be one.

Australia

1. AUD and equity rally continue with strong momentum. The NAB Business Confidence report will be released Tuesday and Westpac consumer sentiment.
2. Neither is likely to have more than a short-term impact.
3. AUD and Australian equities are a strong proxy for global recovery. Sentiment and news in that space will be the primary risk/driver.

China’s extremely positive side

1. It is fortunate, therefore, that the China release has come amidst other heavyweight economic news that was extremely positive.
2. Although the Wall Street rally on Friday, and the weekend’s OPEC+ outcome inevitably set Asian markets up to rally today, the China BOT data is likely to temper the exuberance.
3. China’s Balance of Trade (BOT) was altogether more concerning. The BOT climbed to $62.93 billion, a record. The outperformance, though, was driven by a collapse in imports by 16.70% in May. Although exports fell by a less than expected 3.30%, as international demand suffered further COVID-19 shrinkage, the imports were the real concern.
4. Either the China domestic recovery is slower than expected, or China’s purchasing managers are anticipating tepid demand for Chinese exports going forward. Either way one cuts it, the import drop will be worrying to regional Asia and commodity exporters such as Australia.

Japan’s GDP drop

1. Japan’s Q1 GDP data has passed without incident this morning with the annualized number showing a -2.1% drop, as expected.
2. The markets are unlikely to pay much attention to a backwards-looking number in the present climate, with all eyes on a post-CIVID-19 world.

Market

OPEC+ agreement supports oil

1. Over the weekend, OPEC+ agreed to extend its headline 9.8 million barrel a day production cut for another month until the end of July.
2. Saudi Arabia and Russia also secured commitments from Iraq, Nigeria, Kazakhstan and Angola not only to increase compliance, but also make good their missed targets over the months ahead. Overall, the agreement was an excellent result for the OPEC+ grouping, not only from a headline reduction point of view, but also from discipline on compliance.
3. The US data and an expected positive outcome from OPEC+ on Friday had already seen both Brent crude and WTI leap higher into the week’s end.
4. Brent crude jumped 5.0% to $42.00 a barrel, with WTI climbing 4.80% to $39.10 a barrel.

Gold and the US data

1. The robust US data and the resulting rise in US Treasury yields on Friday was a deadly one-two punch combination of long gold positioning.
2. Gold finished the session down $30.0 an ounce at $1685.00, having touched $1670.00 an ounce in intra-day trading.
3. Although gold has edged higher to $1686.50 in early Asia, the technical picture remains very negative.

Here’s a look at all the important market-moving factors for the week:

Week Ahead

All times listed are EDT

Sunday

19:50: Japan – GDP: expected to rise to -0.5% from -0.9%.

Tuesday

10:00: U.S. – JOLTs Job Openings: anticipated to drop to 5.750M from 6.191M.

Wednesday

8:30: U.S. – Core CPI: seen to have climbed to -0.1% from -0.4%.

10:30: U.S. – Crude Oil Inventories: predicted to surge to 3.038M from -2.077.

14:00: U.S. – Fed Interest Rate Decision: forecast to remain steady at 0.25%.

Thursday

8:30: U.S. – Initial Jobless Claims: expected to come in at 1,500K, lower than last week’s 1,877K claims filed.

8:30: U.S. – PPI: to rise to 0.1% from -1.3%.

Friday

2:00: UK – GDP: probably plunged to -18.7% from -5.8% MoM, and to -22.3% from -5.7% YoY

2:00: UK – Manufacturing Production: seen to plummet to -15.0% from -4.6%

Based on the above factors and the events lined up for the week, the analyst at RvR Ventures suggests you to Trade responsibly; invest only as much as you can lose. All the profits and losses due to the above data are your own personal responsibility. Kindly practice money management & risk mitigation while trading.

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